Sweet Smell of Success

February 10, 2011

Mike Katz, 62, has an edge sharpened not by decades in retail, but by an accounting background that has given him unique insight into the economics of business. The chief of Perfumania Holdings Inc., which operates 350 value-priced fragrance stores in the United States and 20 in Puerto Rico, is a certified public accountant — and, self-admittedly, a relative novice to retail.

Katz’s executive tenure with the company spans 20 years, but the bulk of that time was spent leading its wholesale business. His appointment in 2004 to president and CEO of the retail subsidiary, which consists of the Perfumania stores, perfumania.com and a consignment program called Scents of Worth, allowed Katz to turn his attention to solidifying the company’s retail presence and, in doing so, to apply his accounting experience to steering Perfumania toward a successful expansion platform.

Senior editor Katherine Field talked with Katz about status and growth strategies for the chain, as well as discussed plans for a new prototype rollout and Perfumania’s success in the outlet space.

How has Perfumania weathered the recession?

We’ve weathered it pretty well. Over the last year and a half, the focus has been on adequate liquidity to both run the stores and meet the financial needs of the company. In 2009 and early 2010, we were more aggressive on pricing to ensure liquidity was there and, in doing so, we probably sacrificed some on earnings. But we felt that liquidity was more important than earnings during the downturn.

What is your expansion strategy for 2011 and beyond?

We have the infrastructure in place to expand as economic recovery occurs, but we are not actively chasing growth until that happens. In 2009 we opened 57 stores, and in 2010 we opened nine. This year, the plan is to open 10 to 15 stores. Part of the challenge is what is involved in the evolution of a new store. You might have a new store in an area that is starting to grow, but you have to wait for that growth. In terms of our footprint, we think we can ultimately have 600 doors, but we don’t want to do that until we see stronger growth in the economy.

Being a public company, we have to be trained on shareholder value and expectations. We think there are modest growth opportunities in Canada, and that would be a new market for us as we haven’t pulled the trigger there yet. There are probably three or four Canadian cities that we would target for new stores. Here in the U.S., we would target the West, the Southwest and the Southeast as those have been strong markets for us, and we think there are more opportunities there. The opportunities in the Midwest haven’t been as great over the last 12 to 24 months.

Describe your typical mall site in terms of position, square footage and adjacencies.

In a regional mall, our ideal size is 1,500 sq. ft., of which 1,200 would be selling space. In outlet centers, our profile calls for 2,000 sq. ft., of which 1,700 is selling space. We like to be next to a high-traffic retailer, and it doesn’t necessarily have to be a complementary concept to ours. If every one of our stores could be next to an Apple store, we would be happy!

About 80% of our current stores are in regional malls, outlet malls or strip centers, and we do a few lifestyle center stores, although those haven’t been as successful. We have some urban street stores that have been successful, but the difficulty is achieving the proper rent-to-volume formula. Urban stores are good, but the economics are challenging.

How are you approaching your real estate strategy?

We work with RCS Real Estate Advisors, out of New York City, which serves as our real estate arm. (More on Perfumania’s and RCS’s real estate partnership was featured in the January issue.)

As you roll out more stores, will there be any alterations to your present store design/concept?

We are currently working on a new prototype that is slated for a calendar year 2012 introduction. We are moving toward a more contemporary look, and one that creates a more interactive environment between our salespeople and our customers, and introduces more in-store technology. We will roll out the new prototype in our regional mall locations first, as that is the most appropriate venue for the new look and new services.

How is your mall store differentiated from your outlet store, other than location and product pricing?

We will likely maintain the same store design in the outlet stores, at least for the time being. However, over time we may tweak the design of our outlet stores as well, but it won’t be an immediate change.

What do you think has made the Perfumania model successful?

First, because of the size of our aggregate business, we have enormous inventory clout. We can support the stores with product and be more aggressively priced. But the most important attribute we have is our people. We are a service store, not a self-service store. We invest a lot of money in training so that our associates know about fragrances, so that they know what our customers want and need and can properly serve our customers. Our business is a people business.

How would you describe your leadership style?

To pick a word, participative. The responsibility of senior management in any company is to create the environment and provide the tools for people to be successful. At Perfumania, we don’t micro-manage. We jointly define goals and, hopefully, our people will get the positive end result.

Has your accounting background impacted how you lead/operate?

Because of my accounting background, I understand the economics of business pretty well. Businesses have a myriad of entities to interact with, from vendors to shareholders to landlords, customers and associates. Understanding the economics of each of those interactive parts is very helpful when steering a business.

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